Download AAPL will use strong brand and customer loyalty to capture market

Krause Fund Research
Spring 2016
Technology
Apple Inc. (NASDAQ: AAPL)
Recommendation: BUY
Current Price: $109.85
Target Price: $150 - $180
April 15, 2016
Analysts
AAPL will use strong brand and
customer loyalty to capture market
share in future markets
Yiyao Lin
[email protected]
Ross Gibson
[email protected]
• Apple has lost some of its ability to be continually innovative
in the highly competitive smartphone and PC markets.
Company Overview
Apple Inc. (NASDAQ: AAPL) is a leading global
provider of consumer electronics and other technology
services. Some of Apple’s most notable products are the
iPhone, iPad, Mac, and iPod. Within recent years, Apple has
begun to expand upon their core line of services they offer
which include Apple Pay, iTunes, iMessage, and Apple
Radio. With an extremely strong brand and dedicated
customer base, Apple is able to market and sell their products
to a global audience and generate sales in many countries
across the globe.
• Future products within the consumer electronics industry,
such as virtual reality, may be beneficial to Apple if they choose
to pursue these product lines. With iPhones being the most
popular smartphone in the market, it would not take much for
Apple to turn the iPhone into a virtual reality headset and quickly
capture market share in the growing virtual reality market.
• Apple’s continuing growth of their “services” product lines
will help Apple keep market share in the future.
• The future for Apple Pay looks bright. With the deceasing
use of physical payment methods, Apple Pay has potential to fill
this gap consumers are looking for. Apple pay can be easily
integrated on any iPhone and already works at many vendors
across the country. Also, Apple Pay is already growing to
countries other than the U.S.
Stock Performance Highlights
52 week High
52 week Low
Beta Value
Average Daily Volume
$134.54
$92.00
1.30
4.05 m
Share Highlights
Market Capitalization
Shares Outstanding
Book Value per share
EPS 2015
P/E Ratio ttm
Dividend Yield
Dividend Payout Ratio
• In addition to Apple Pay, Apple Music and iCloud show
strong monetization potential. Consumers are more heavily
relying on subscription-based programs for their music. In
addition, iCloud has begun to earn money for Apple by charging
consumers money to increase the data storage capacity of their
cloud storage service.
$609.07 b
5.58 b
$23.13
$9.28
11.69
2.02%
21.34%
Apple has strong potential to tap into developing markets that
don’t currently have a strong smartphone presence, such as India.
Company Performance Highlights
ROA
ROE
Sales
One Year Stock Performance
18.38%
44.47%
$233.72 b
Financial Ratios
Current Ratio
Debt to Equity
1.11
44.79%
Source: Bloomberg Business
1
relationship can be derived from the increased
consumer spending and confidence in the economy.
The following chart shows the change in U.S. real
GDP in the last ten years. Historically, you can see
that real GDP growth remains between 2% and 3%,
except during a recession such as in 2008.
EXECUTIVE SUMMARY
Apple is the largest technology company in
the world based not only on market cap, but also on
sales, profits, and assets.4 Although Apple has
recently suffered from slowed iPhone and iPad sales
in the U.S, we still believe Apple has the potential for
growth in the future. We believe this because the
company is expanding its services and overall product
mix and in the future will not rely as heavily on
iPhone and iPad sales. We anticipate a rapid growth
in the popularity of Apple’s services, especially in
newer services such as Apple Pay and Apple Radio.
In addition, we believe that new and innovative
hardware products Apple may introduce in the future
will help boast increased sales for the company.
Apple is reported to be working on both their own
electric/autonomous vehicle5 as well as a newly
patented virtual reality headset6. Although these are
not new ideas, Apple’s strong brand and loyal
customer base would help make these two new
hardware items become a staple of Apple’s product
mix. Due to these factors and potential for future
growth, we recommend a buy rating for Apple Inc.
Source: Bloomberg Business (Updated 2/26/16)7
Unemployment Rate
The U.S. national unemployment rate is
calculated by The Bureau of Labor Statistics (BLS)
and is done by surveying 60,000 households across
the country. After data is collected from this sample
population, the unemployment rate is calculated by
dividing the number of people who are gainfully
employed by the number of people who are out of a
job, but who are actively looking.9 People who claim
to be out of a job and not actively looking are not
accounted for in the calculation of the national
unemployment rate.
Consumer confidence is inversely related to
the national unemployment rate because when
consumers see an increasing unemployment rate, they
fear a potential economic turmoil may be near. The
current unemployment rate in the U.S. is 5% and as
you can see from the chart below, the unemployment
rate has been steadily decreasing for the past five
years. This is important to Apple, because as more
consumers are employed the amount of disposable
income consumers are willing to spend on products
such as Apple’s will increase.
ECONOMIC OUTLOOK
Real Gross Domestic Product (GDP)
The real gross domestic product is the
inflation adjusted value of all goods and services
produced within our economy during a given time
period. GDP is often used as an economic indicator
for the overall health of the economy. One method of
calculating GDP is by using the expenditure method
which is calculated by the sum of four main factors
which are: private consumption, private investment,
government spending, and net exports.2 Since a large
portion of GDP is calculated based upon private
investments and consumption, GDP can be related to
other economic factors such as Consumer Confidence
Interval (CCI) and Unemployment Rate.
Future growth rates of GDP can help us to
predict the growth in Apple’s sales numbers. With a
1.4% growth of real GDP in the fourth quarter of
2015 and a forecasted growth of GDP being between
2% and 3% in the coming years, we can predict that
apple’s sales, in the U.S. will also increase.3 This
2
The foreign exchange rate represents the value
of one currency against that of another. The value of
the US dollar is crucial to many countries and
international companies. Companies, like Apple, that
deal overseas have to keep a close eye on the
exchange rates to avoid losses in their profits. The
top eight Information Technology companies have
45% of their net income overseas, so these companies
need to pay close attention to these types of indexes
so to not affect their bottom line.
The US Dollar Index compares the US Dollar
to a basket of six other currencies. The US Dollar
Index started at 100 basis points in 1970 and anything
below that would imply that the value of the dollar
has decreased. This index is currently juts below 95
which means the dollar is still relatively pretty strong
as it has only decreased roughly 5% in forty years.
Below is the historical chart for the US Dollar Index
which shows a fairly strong dollar for the past two
years.
Source: Bloomberg Business (Updated 1/8/16)10
Inflation Rate
The inflation rate in the U.S. is calculated by
tracking the changes in the Consumer Price Index
(CPI). CPI and Producer Price Index (PPI) are
closely related to one another. For example, PPI in
the technology sector has been steadily decreasing
since 1990 due to what we believe are improved
technologies for producing IT hardware.11 This is
idea is related to Moore’s Law which states that the
number of transistors on a circuit double roughly
every two years and because of this keep technology
costs down.
Due to the decrease in PPI, the CPI in the
technology sector has also been decreasing because of
decreased production costs and an increased supply of
hardware and software in the market. Within the last
five years, the overall inflation rate has been pretty
low, in between 0% and 2% with it being less than
1% the last three. This trend is illustrated in the graph
below.
Source: Bloomberg Business13
Consumer Confidence Interval (CCI)
The Consumer Confidence Interval (CCI) is a
measure of consumer’s optimism on the health of the
economy. A high CCI means that consumers are very
optimistic about the current and potential future of the
economy, which has the potential to lead to increased
spending of discretionary income in the economy. As
you can see from the graph below, CCI has been on
the rise for the past five years.
We believe that when there is a higher CCI,
companies in the Information Technology sector will
be more profitable due to increased disposable
income for consumers to spend their money on
consumer electronics. In addition, with personal
income levels increasing around an annual rate of
0.4% we can expect all sector to benefit due to
increased money for consumers to use at their
Source: usinflationratecalculator.com12
Foreign Exchange Rates
3
discretion. In the future, we predict CCI to continue
to increase at a constant rate of around 2% over the
next couple of years.
Over the past year, the information technology
sector has been outperformed the market, while the
Technology Hardware, Storage & Peripherals
industry underperformed the market.15
Source: Fidelity
Source: tradingeconomics.com14
Industry Trends and Recent Development
The consumer electronics industry is
extremely sensitive and competitive, as companies are
constantly introducing new technologies and
products. The industry also presents a great potential
for growth, as there are many technologies and
products, such as Virtual Reality (VR) and the
Internet of Things (IoT), which are under
development and customers have high expectations
about them.
INDUSTRY ANALYSIS
Industry Overview
Apple manufactures and designs a wide
variety of electronic products including smartphones,
tablets, personal computers, and smart watches. In
addition, they also provide various kinds of software
and services for their end consumers. The company
operates and compete in several different sub
industries, which fall within the Information
Technology sector. In the fiscal year of 2015, 66.34%
of Apple’s sales revenue came from iPhone sales,
which makes the smartphone industry Apple’s main
area of operation. Below are the products and services
Apple currently offers the following products
classified by sub industries:
Smartphone Sales
Over the past 8 years, the sales of smartphones
have been increasing dramatically. This is mainly
due to the replacement of traditional feature phones
with cell phones and has attracted new customers. In
2012, the ratio of non-smartphones and smartphones
was 58% to 42%, respectively. According to IDC,
they expect the ratio to become 27% to 73%, and will
eventually reach 12.3% to 87.7% by 2019, which
suggests a well penetrated market. The growth rate of
shipments of smartphone in 2014 was 27.5% while
the growth rate in 2015 decreased to 9.8%. This
suggests a slowly declining growth rate due to the
increasing market penetration. IDC also suggests that
current smartphone shipments of 1.3 billion will reach
1.9 billion in 2019 with a 7.4% CAGR. As for the
flow of shipments, IDC suggests over 50% of
smartphones will be going to APAC countries, about
30% will go to Europe and East Asia, and the rest will
go to the Americas.
Consumer Electronics:
iPhone, iPad, iPod, Apple Watch, Apple TV
Personal Computer:
iMac, MacBook
Internet Software & Services:
Apple Store, Apple Music, Apple Pay, iTunes, iOS
and Mac OS
The “Information Technology Sector”
accounts for 20.8% of market capitalization of the
S&P 500 index and a 2.47% YTD return as of march
31, 2016. Due to the nature of the sector, the health of
the overall economy will greatly influence this sectors
performance.
Tablet Sales
4
trial program of Windows 10 may have delayed some
customers to upgrade their PCs and the release of the
iPad pro may have affected laptop sales as well. IDC
is also forecasting a -3.1% growth in PC sales in
2016.16
Wearable Sales
The wearable market has been rapidly
growing in recent years. IDC expects the shipments of
wearable devices to reach about 90 million in 2015
and increase by at least 30% in 2016. We expect great
potential for growth in the wearable industry because
smart wearable devices are capable of enhancing the
integration of mobile devices.18
Source: IDC
The shipments of tablets have grown from 19
million in 2010 to over 220 million in 2012.
However, the increase has slowed down over 20132014 due to the cannibalization of large screen
smartphones. We believe the current tablet industry is
undergoing a major change. The total shipments of
tablets ahs dropped from 230 million to 206 million in
2015, which is a 10% decrease. The shipments for
detachable tablets reached 8.1 million in 2015.
Customers consider detachable tablets as a
replacement to laptops, which suggest strong
cannibalization between the two industries. IDC
forecasts the sales of tablets to steadily raise and
reach about 276 million by 2017.17
Music Streaming
Currently there is a great shift going on in the
music industry, instead of downloading or physically
purchasing music. People are starting to use paid or
ad supported music streaming services such as Apple
Music and Tidal. Within the past year, the number of
paid music subscribers increased form 7.7 million to
10.8 million. In 2013, the revenues generated by
music steaming was over 1.4 billion. This only
accounted for about 21% of the total revenues in the
U.S music industry. Revenues increased to 2.4 billion
in 2015, which accounted for about 36% of total
revenues in the U.S. music industry. 19
Markets and Competition
Apple offers a wide range of products and
services across a variety of industries. Since the
iPhone is the major source of income of Apple, which
accounted for 66% of total sale revenue in 2015 and
also the center of the Apple’s “ecosystem”, we will be
focusing on comparing Apple with large cap
competitors that are publically traded in the U.S., and
its biggest competitor in the smartphone market,
Samsung.
Source: IDC
PC Sales
The shipments of PCs and laptops have been
consistently decreasing since 2011, mainly due to the
longer lifecycle of PCs and the introduction of tablets
and large screen smartphones. While the other four
major PC vendors suffered a decline in their PC
shipments, Apple had an increase of 1.2 million units
and a 2.5% increase in revenues over 2015. The free
Source: Yahoo Finance
5
As the biggest competitor of Apple, Samsung
had 167.94 billion in revenues while Apple had
234.99 billion in revenues in 2015. Apple had the
highest revenue over its competitors. Considering
over 60% of Apple’s revenue comes from smartphone
sales and the fact iPhone only occupied about 13% of
market share in 2015, their ability to make customers
pay a premium on their product is incredible. Apple
has the highest profit margin among their listed
competitors at 22.87%, while its competitor Samsung
is only at 8.86%. Google has a slightly lower profit
margin, but way lower sales revenue. The huge
advantage Apple has on profit margins is what
differentiates Apple from its competitors. With the
high profit margins, Apple also has the highest
ROA/ROE ratio in the group at 16.02% and 30.28%
respectively, while Samsung has ROA/ROE of 6.99%
and 10.98%, respectively. All the companies in the
group are incomparable with Apple in statistics.21
Innovation is most critical for the technology
industry, and as a rough indicator of efforts a
company is investing in innovation, R&D
expenditures represent a company’s indirect
competitiveness. Among the listed companies,
Samsung has the highest R&D expenditures at 13.8
billion while Apple has only 8.06 billion of R&D
expenditures. Intel invests 21.9% of their sales into
R&D, being the highest percentage in the group.
Samsung has R&D expenditures of 7.3% of sales
compared to Apple’s 3.5% in 2015. This does not
indicate Apple does not care about research and
development. The main reason for Apple to have a
low R&D cost is that, compared to its competitors,
Apple operates in less industries and offers a
narrower range of products and services to customers.
cost of switching brands is low and the competition
between companies is very high. The mobile phone
market is mature and well penetrated. The market
share a company has could strongly influence the
revenues of the company.
Bargaining Power of Supplier (Weak to Moderate)
Apple faces a weak to moderate influence
from the bargaining power of suppliers, mainly
because of the large amount of suppliers available.
However, the opportunity cost and time investment
for rebuilding the supply chain is high and unworthy.
Apple is likely to accept reasonable requests from
suppliers in their supply chain. On the other hand, the
suppliers would most likely want to retain Apple as a
customer. Based on this we suggest weak to
moderate bargaining power of suppliers.
Threat of New Entrants (Weak to Moderate)
Apple should not be worried about new
entrants too much. It is likely that there will be new
entrants in the industry, but these new entrants would
not be able to take away much market share from
Apple. This is because Apple has already built up its
ecosystem of products, has a strong brand, and a loyal
customer base. It would also require extremely high
amounts of capital, development expenses, and a
large amount of time to build up attention and a
strong customer base. While the mobile phone market
is a matured and well-penetrated market, the
competition between existing companies is extremely
aggressive; the opportunity cost of entering in the
high-end smartphone industry is high.
Threat of Substitutions (Weak to Moderate)
Apple experiences a weak to moderate
influence from substitutes, there are already various
kinds of substitutions to apple’s products in the
market. However, Apple products are also usually
more high-end and expensive compared to its
substitutes. These substitutes have either lower
performances or less attractive features, which makes
them less competitive.
Apple has built up its brand and brand name
over the past decade, which distinguishes them from
their competitors. Apple is capable of selling their
products and services at a premium and customers are
willing to pay that premium for their products. This
advantage is unlikely to be surpassed by competitors
in the near future.
Porter’s Model Analysis
Competitive Rivalry (Strong)
Apple faces strong and highly aggressive
competition from its competitors, such as Samsung
and LG. Apple operates in various sectors of
consumer electronics, such as operating systems.
Apple is constantly competing with other companies
in every industry Apple operates in. As the switching
cost for smartphones is relatively low and service
carriers are offering various plans and contracts, the
competition is even more intense.
Bargaining Power of Buyers (Strong)
Apple experiences strong influences from the
bargaining power of buyers. As mentioned above, the
6
The major sources of income for the leading
companies in the Technology Hardware, Storage &
Peripherals sector is smartphones. As the smartphone
market is highly competitive, smartphone
manufacturers have to adopt quickly and introduce
new features, since their different product lines are
become less distinguished. Companies will have to
compete on price and lower their margin on
smartphones to stay competitive, which leads to the
decrease in profitability of the entire industry.
Catalysts for Growth/Change
There are two types of catalysts that can drive
this industry forward. Technological advancements
could lead to new potential customers or could lead to
increased sales in existing product lines.
For instance, wearable devices, specifically
smart wearable devices, serve as a great catalyst for
growth in the industry. There is potential for the sales
of smart wearables to grow if most of the devices
have standalone internet connection opposed to being
reliant on another smart device for an internet
connection such as a smartphone. In addition, there is
room for growth with different kinds of wearables
that may be developed in the future. In the future,
wearables are not limited to watches or glasses.
The sale of mobile phones could very likely
be a critical catalyst for growth or change. Even
though the mobile phone market is well penetrated
and mature, 27% of mobile phone shipments are still
feature phones, so the potential for growth is huge.
There are countries and regions in the world that have
huge populations, but have a rather low smartphone
penetration rate. For example, India only has a 26.3%
smartphone penetration rate as of 2015, and India’s
population accounts for about 17% of the world’s
total population. In addition, since smartphones are
generally priced higher compared to traditional
feature phones, customers with lower income would
be more likely to consider feature phones due to their
reduced cost. If the average purchasing power of
consumers increases or the economy is in good shape,
the sales of mobile smartphones will likely increase,
which will drive the industry to raise.20
COMPANY ANALYSIS
Overview
Apple Inc. is the largest company in the
technology sector, the company design,
manufactures and sells various kinds of consumer
electronics and digital services. The company
offers products and services which include
iPhone, iPad, Mac, iPod, Apple TV, Apple watch,
iOS and OS X operating systems, iCloud, Apple
Pay and a wide variety of other services and
accessories. The company also delivers digital
content through iTunes. The company sells its
products and services through its own retail/online
stores as well as third-party cellular carriers.
Key Investment Positives and Negatives
Positives
There are various rapidly developing
technologies that have potential to be the “next big
thing”. Technologies such as virtual reality, internet
of things, cloud computing, wearable devices, and 3D
printing, all show a positive investment outlook.
The majority of companies in the industry
have a high product margin, since they outsource the
production and assembling of their hardware products
to overseas factories. This reduces the labor,
inventory, and transportation costs, and leaves room
for higher profits.
Source: Apple 10-K1
Company strategy
We believe Apple’ business strategy is to
bundle its products and services. They primarily
focus on the sales of iPhone, the core product of their
product ecosystem, and maintain a high profit margin
and stable market shares for iPhone, and develop
other product and services to “add value” to their
iPhone. We’ve seen for the past few years, Apple
starting to develop products and services that are
highly integrated with the use of iPhone, such as
apple music, apple pay and apple watch. Apple built
an ecosystem using their various kinds of products
Negatives
7
and services, which all benefit from the brand and
fame they have built up. Apple is able to reinforce the
strength of the whole ecosystem and maintain their
profitability as they keep adding and integrating new
and existing products and services. As the number of
Apple product users increases, their future products
and services would benefit from the increasing
customer base and brand name, which creates a
virtuous cycle. As Apple keeps introducing new
services and products that are highly integrated with
their ecosystem to consummate the functionality of
their product system, it would be hard for competitors
to imitate or compete with Apple’s products. After an
ecosystem was built, other products and services in
the system would add value to the product, for there is
a potential for the customer to receive extra benefits
from other products in the system, and that is worth a
premium.
center of Apple’s ecosystem, it is likely iPhone will
be the major source of income with in next 5 years,
and an increase in iPhone’s diversity, such as offering
multiple models, would help Apple to better satisfy
customer needs.
Apple Watch
Apple watch has the potential to improve
Apple’s ecosystems, as currently Apple watch itself is
highly integrated with iPhone. We see a great
potential of growth in wearable industry, as the
industry is redefined after the introduction of smart
wearable devices, and Apple as the pioneer of the
industry, could gain benefits from the development of
the industry.
Mobile device services
Services such as Apple pay and Apple Music,
are critical in perfecting the ecosystem of Apple. The
“value adding” services would not only generates a
revenue stream, it would also help Apple to expand
their customer base as they venture into new
industries or enhance their influence in the existing
industries. Providing more services would increase
customers' daily usage of Apple products, gradually
accommodating customers with apple product system
and build a long-term relations.
Recent Development
Apple recently released iPhone 5 SE, which is
a new product with smaller screen and decent specs
and is priced at $399 with 16GB of storage. It
provides apple’s customers with more choice on
screen size and price, it is supposed to compete with
Samsung’s wide selection of smartphones and attract
and retain customers from low-end smartphone users.
The sales estimation for iPhone SE is 17 million
units, which is an additional $7 million in revenue.
Based on current gross margin of 40.1%, this will
yield a profit of $2.8 billion, and we anticipate the
cannibalization of other iPhone models to offset and
attract new customers.
Marketing Competition
Apple operates in a market that is very
competitive. The Information Technology industry is
dominated by constant innovation and because of this
leads to very short product life cycles. New products
and whole product lines are constantly being
developed and marketed.
Catalysts for Growth
iPhone
Since the core of Apple’s ecosystem is the
iPhone, and the major revenue generating product
line, an improvement in iPhone that would further
distinguish their products form their competitors
would be a great catalyst for growth. For instance, the
introduction of the 3D touch screen and live photo on
iPhone 6+, which adds more features than its
competitor’s products. The release of iPhone 5 SE
would benefit both the company and the product
system, as the release of iPhone 5 SE provided
customers with more options on specs, screen size
and price, which creates value for customers. This
would also attract customers who prefer lower cost
smartphones. As we believe iPhone will remain at the
Smartphone Market
The smartphone market is very large and
spans multiple countries in size. Apple is the
dominant force in this market, but there are many
other global competitors. Some of the major
competitors include Samsung, Huawi, Xiami and
Lenevo. Apple as well as its competitors are
continually coming out with a newer model of their
devices, some of these companies will produce
anywhere from one to two devices in each of their
product liens per year.
Tablet Market
8
Apple was one of the first to develop a tablet,
the iPad, but many of it consumer electronics
competitors have followed suit. Today, Samsung is
not far behind Apple in unit sales of tablets. In the 2nd
quarter of 2015, Apple sold nearly 11 million tablets,
followed by Samsung who sold about 7.5 million.1
Positive future for wearable and software services
industry, which Apple currently starts to operate.
Negative
Over 60% of company revenue comes form the sales
of iPhone, the company is dependent on the revenue
of iPhone, the smartphone industry is highly
competitive and Apple might be forced to lower the
margin on iPhone due to strong competition, which
would have a huge impact on their revenue.
Wearable Market
Although Apple was not the first of its peers
to design and create a wearable, smart, device, Apple
has begun to capture a large market share wit their
release of the Apple Watch. Nearly 72 million
wearable devices were sold in 2015 alone with annual
sales projected to more than double by 2019.21
VALUATION
Assumptions
We used four models to compute the
future value for Apple Inc. stock, which are
Discounted Cash Flow (DCF), Economic profit
model (EP), Dividend Discount Model (DDM)
and Relative price to earnings analysis. The price
calculated by DCF/EP, DDM and relative price to
earnings analysis are $170.57, $105.00 and
$146.95 respectively. We believe the instrinsic
value of Apple stock is within the range of $150
to $180.
We believe innovation is the key value
driver for the industry, and due to the nature of
technology, the product life cycle in the industry
is rather short. Being able to stay innovative is
key to survive and grow in such a competitive
industry. That is why we anticipate a steady
growth in Apple’s R&D expense, in the past 3
years, Apple’s Research and Development
expense raised from 4.4 billion to 8.06 billion,
which is 2.6% and 3.5% of sales. As stated in the
annual report, Apple believes investments in R&D
is critical for them to stay competitive in the
future. As the range of products and services
Apple offers keeps expanding, such as Apple Pay,
Apple TV and the possibly virtual
reality/augmented reality in the future, we believe
that apple will keep increasing their R&D
expenditure and will reach 11.9 billion by 2021,
which is 4.4% of the forecasted sales.
We expect revenue from the iPad product
line, which accounted for 9.94% of total sales in
2015, to slowly decrease over the next 5 years and
remain stable after that. Since iPad market shares
are being cannibalized by bigger screened
iPhones, its also facing strong competition from
lower end tablets with cheaper prices. We expect
the introduction of the iPad Pro to slow down this
PC Market
Although Apple is not the current leader in PC
sales, they were the one of the first to innovate and
create the idea of a personal computer. With the rise
of tables and newer devices, PC sales have for the
most part been cannibalized by other product lines.
In addition, due to Apple’s steep premium on their
computers, many consumers are, and will continue, to
choose Apple’s competitors if they want to purchase a
PC.
Research and Development Expenses
Apple currently has some of the lowest
research and development costs among its peers.
In 2015, Apple had a mere 3.5% R&D as a
percentage of sales.1 Although this may sound
like a bad thing for Apple, it is in fact because
Apple has a core line of products in which it is
researching into and trying to innovate opposed to
its competitors who have many more product
lines.
Investment Positive and Negative
Positive
Strong Brand: Apple has one of the strongest brands
in the whole industry. Consumers simply hear or see
the Apple logo and know the product they are buying
is of high quality. Product and services structured
around the brand and iPhone, we expect a healthy and
positive growth as other products and services keep
creating value for the ecosystem.
Apple have 233 billion of cash and equivalents
available, which would prevent the company from
short term financial issue.
9
declination, and we expect the iPad revenue to
decline to 20.25 billion in 2021, which will
account for 7.44% of total sales.
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Fund may hold a financial interest in the
companies mentioned in this report.
Forecasted Sales
We expect that the sales of iPhones will
begin to slow in the near future. iPhone sales in
the United States have already begun to slow and
we feel the same will happen in the Asian market
unless there is some intense innovation in the
market, which we do not foresee.
With the ever increasing screen size of the
iPhone, expect that what iPhone sales there are
will cannibalize some of the iPad market share.
Due to this we think that the end consumer will
have less incentive to purchase iPad and will lead
to deceasing sales volume of iPads.
Due to this high premium on Apple
products, especially on their Mac product line, we
feel that Mac sales will taper off and consumers
will start buying more of competitors devices
which will be smaller, have more features, and be
priced lower than Mac.
With all that being said we do predict that
Apple’s “services” product line will show strong
growth in the coming years. Apple Pay shows
strong potential as consumers are moving more
towards contact-less paying instead of using
physical cards. With many consumers already
having apple devices, the switch to Apple Pay will
be quite effortless. In addition, Apple Music
shows strong upside as many people are going by
the subscription plan for their music. Also, with
the rise of cloud computing and cloud storage, we
predict that iCloud will be able to monetize on
this in the future b consumers purchasing larger
storage space on the iCloud platform.
References
1Apple 2015 10-K
2Investopedia
GDP(http://www.investopedia.com/terms/e/expen
diture-method.asp)
3Bloomberg Q4 GDP
(http://www.bloomberg.com/news/articles/201603-25/u-s-economy-grew-1-4-in-fourth-quartersupported-by-consumers)
4Forbes Apple Article
(http://www.forbes.com/sites/liyanchen/2015/05/1
1/the-worlds-largest-tech-companies-apple-beatssamsung-microsoft-google/#19e19538415a)
5Apple Car Rumor (Project Titan)
(http://www.techtimes.com/articles/123597/20160
112/apple-s-project-titan-everything-we-know-sofar-about-apple-s-highly-rumored-electric-carproject.htm)
6Apple Virtual Reality Patent
(http://www.techinsider.io/apple-just-patented-avr-headset-2016-3)
7Historical GDP Chart
(http://bloomberg.econoday.com/byshoweventfull
.asp?fid=472136&cust=bloomberg-us)
8Growth in Apple Services
(http://seekingalpha.com/article/3848226understanding-apple-growth-services?page=2)
9Unemployment Rate Calculation
(http://www.investopedia.com/ask/answers/06301
5/how-does-us-bureau-labor-statistics-calculateunemployment-rate-published-monthly.asp)
Cost of Goods Sold
Historically, Apple’s cost of goods sold
has remained between 54% and 64%. We used
the average COGS from the last ten years and
used this average number to forecast cost of goods
sold as a percentage of sales into the future.
Important Disclaimer
This report was created by students enrolled in the
Security Analysis (6F:112) class at the University
of Iowa. The report was originally created to offer
an internal investment recommendation for the
10
10Historical
Unemployment Chart
(http://bloomberg.econoday.com/byshoweventfull
.asp?fid=472111&cust=bloomberg-us)
11Historical PPI Data
(http://data.bls.gov/pdq/SurveyOutputServlet?req
uest_action=wh&graph_name=WP_ppibrief)
12Inflation Rate Data
(http://www.usinflationcalculator.com/inflation/cu
rrent-inflation-rates/)
13Exchange Rate Data
(http://www.bloomberg.com/quote/DXY:CUR)
14CCI Historical Chart
(http://www.tradingeconomics.com/unitedstates/consumer-confidence)
15Inforamtion Technology Breakdown
(http://us.spindices.com/indices/equity/sp-500)
16PC Sales
(http://www.idc.com/getdoc.jsp?containerId=prU
S40909316)
17Tablet Sales
(https://www.idc.com/getdoc.jsp?containerId=prU
S40990116)
18Industry Trend
(http://www.netadvantage.standardandpoors.com.pro
xy.lib.uiowa.edu/NASApp/NetAdvantage/showPublic
ation.do?dataPosition=1&KEY=45202030)
19Music Streaming
(https://www.statista.com/chart/4557/us-musicindustry-revenue/)
20India Smartphone
(http://www.statista.com/statistics/257048/smartp
hone-user-penetration-in-india/)
21Smartphone Market Shares
(http://www.idc.com/prodserv/smartphone-os-marketshare.jsp)
http://marketrealist.com/2016/03/will-new-iphoneimpact-apples-average-selling-price/
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